May 2 (Bloomberg) -- Romania’s central bank kept the
European Union’s highest borrowing costs unchanged for a ninth
meeting, while paving the way for a cycle of interest-rate cuts
amid a faster-than-predicted slowdown in inflation.

The Banca Nationala a Romaniei left the benchmark rate at
5.25 percent today, according to an e-mailed statement, matching
the estimates of all 19 economists surveyed by Bloomberg. It cut
the overnight Lombard rate by 100 basis points and raised the
deposit-facility rate by the same amount in a bid to lower rates
on leu borrowing and curb money-market volatility.

“Our message is: we’ll start a cycle that we hope we won’t
have to interrupt” because of the possible negative effect of
poor weather on agriculture and the economy, central bank
Governor Mugur Isarescu told reporters today in Bucharest.“This
cycle will include several sessions of reductions of the
monetary policy rate.”

Romania halted a rate-cutting cycle a year ago as poor
agricultural output boosted food prices and a pledge to the
International Monetary Fund and the EU to free energy tariffs
increased utility bills. It’s seeking to join other countries in
the region, which are dropping rates to spur growth as the euro
area struggles with a debt crisis, as inflation will probably
slow to within a targeted band in the second half of the year.

Leu Drops

Romania’s currency and bonds have rallied this year on
increased demand from international investors after JPMorgan
Chase & Co. and Barclays Plc included some of the country’s
securities in their government-debt indexes last month.

The leu, eastern Europe’s best performer this year against
the euro, traded at 4.3212 in Bucharest, down 0.1 percent from
yesterday’s close, paring losses after the decision.

“Given recent improvements in fundamental factors, under a
favorable disinflation perspective, a more benign exchange-rate
environment and a still-negative output gap, the room for the
central bank to start an easing cycle has enlarged,” Catalina
Molnar, chief economist at UniCredit Tiriac Bank SA, said today
by e-mail. “A bold decision for the National Bank would be to
bring the key rate down to 4.5 percent by year-end. However any
deterioration in perspectives in the short run could maintain
the wait-and-see mode.”

Regional Trend

The bank cut the overnight Lombard rate to 8.25 percent
from 9.25 percent and raised the deposit-facility rate to 2.25
percent from 1.25 percent. It left its minimum reserve
requirements on foreign-exchange deposits at 20 percent and the
ratio for leu deposits at 15 percent.

Romania can accelerate reductions in its main interest
rate, joining other eastern European nations, because inflation
is easing quicker than previously thought, Isarescu said.

Neighboring Hungary cut its main rate to a record-low 4.75
percent on April 23 to help its economy emerge from a recession
as the inflation rate stood at 2.2 percent in March, the lowest
in almost 39 years. Poland’s central bank also reduced its
benchmark seven-day reference rate to 3.25 percent on March 6.
The Czech Republic has kept the rate at 0.05 percent since last
November and is expected to remain on hold at today’s meeting,
according to a Bloomberg survey of 18 economists.

Romania’s inflation rate, the EU’s highest, fell more than
estimated in March to 5.25 percent from 5.65 percent in
February. The central bank has cut this year’s 3.5 percent
forecast for price growth as demand waned, Isarescu said,
without specifying the new estimate.

“We are currently looking for inflation to slope downwards
more markedly in the second half of the year, following a more
auspicious agricultural year,” Banca Comerciala Romana SA
economist Dumitru Dulgheru wrote in a note after the decision.

Romania avoided a recession last quarter as gross domestic
product rose a seasonally adjusted 0.4 percent from the previous
three months. The economy is set to grow 1.6 percent this year,
according to the European Commission.